When consultancy firm Everest Group last year asked offshore service providers around the world where they planned to expand their global footprint, South Africa ranked firmly in the top three answers with only China and Brazil offering serious competition. We decided to examine what is so appealing about South Africa – and more importantly – what strategies investment agencies are executing to win a surprising amount of global attention.
The South African offshore BPO industry grew over 85% between 2007 and 2010 and in 2009-10 it contributed nearly $250 million to South African exports, according to the public/private trade promotion group South Africa BPO. The sector currently supports 10,000 jobs, with over 10,000 more committed by leading companies. There has been a steady stream of major multi-nationals such as Microsoft and Amazon outsourcing operations to South Africa and five of the top 10 BPO voice providers now have operations in the country.
Gareth Pritchard is the CEO of BPeSA Western Cape, a Cape Town BPO trade promotion group. He believes South Africa’s rapid growth can be explained by a combination of natural advantages and key improvements to the business environment for BPO operators. (Convergys, which has operations in South Africa, is one of the nation’s biggest advocates – telling Nearshore Americas in March at a Montego Bay, Jamaica conference that South Africa’s investment promotion is among the world’s best… adding that Caribbean and Latin America players can learn from their strategies.)
Call Centers Dominate Landscape
Outsourcing in South Africa is currently dominated by call centers, a sector in which it has a clear linguistic advantage over many of its rivals. According to Pritchard, South Africa produces 345,000 English speaking graduates a year, making it the third highest English servicing BPO supplier and South African English is widely considered a neutral accent.
The sector has also benefited from a dramatic drop in telecommunications costs, which had previously been an obstacle to investment. Telecom costs plummeted 85% between 2003 and 2009, according to Pritchard, and will continue to fall by 15-25% a year over the coming years.
Above all, the crucial factor for Pritchard is the cultural affinity between South Africans and the British – who make up the bulk of the South African market. “The average South African understands the average Brit exceptionally well,” he said, “and if you are talking about a value proposition that’s what we are working on – making people understand how close that cultural affinity is.”
“We’ve explained to the market that cultural affinity aspect and we’ve explained to the market what we’ve got – we have very strong infrastructure, we have good people and we have a competitive cost structure – putting it all together it is becoming formidable.”
Improving Market Share
However, the South African success story has not only been based on these advantages but also on learning how to successfully market them. “We haven’t done a good job at selling ourselves in the past,” said Pritchard. That, he says, has now changed. “Over the last two years we have positioned ourselves better. We’ve explained to the market that cultural affinity aspect and we’ve explained to the market what we’ve got – we have very strong infrastructure, we have good people and we have a competitive cost structure – putting it all together it is becoming formidable.”
The outsourcing boom in South Africa has also been fuelled by strong government backing. The South African government made the BPO sector one of its top three priority sectors in its Industrial Policy Action Plan and has been promoting investment through aggressive incentives programs. “All the companies here should be able to survive without those incentives,” said Pritchard, “but they are making heads turn dramatically.”
With the latest incentive scheme launched in January 2011, Pritchard has predicted a further 20% drop in cost arbitrage, which had stood at 50-60% from source destinations. Current incentives include large grants for each offshore job created with bonuses if the company reaches 400 and 800 seats. “That is the one that is making people raise their eyebrows and say ‘well, why wouldn’t we be there?’” said Pritchard.
Keeping a Handle on Growth
However, such rapid growth can bring its own problems, especially in ensuring human capital development keeps pace with expansion. In a bid to avoid exhausting its human resources, the South African government has initiated a training program that has already trained several thousand people in entry-level skills as well as offering tax incentives to companies for training employees. Nevertheless, there have been serious shortages at the mid-management level – something Pritchard identifies as the single biggest limitation to continued growth.
Kobus Van Der Westhuizen is a senior vice president at leading global outsourcers Aegis and the head of its South African operation. After arriving in 2009, Aegis South Africa more than doubled in size in its first two years of operations and it currently employs approximately 2,000 people in 13 contact centers. In attempting to manage such quickfire growth, Van Der Westhuizen has found the labor shortages at management level have increasingly become an issue.
“When you grow this fast then skills are always a challenge and you have to invest a lot in education, training and development of skills in the sector – not just on entry level but on middle and senior management levels as well,” he said. “When you grow too fast then you get scarcity in those skills and your costs escalate.”
According to BPO analysts Fifth Quadrant, South Africa could also find external pressures limiting its growth. As it moves away from the pack of emerging locations, South Africa will increasingly have to compete with the established outsourcing powerhouses of India and the Philippines while still fending off competition from other developing markets in China and Latin America.
However, for the moment the sector is projected to continue to grow at around 30% a year. Most of that business continues to be from the UK, which makes up 56% of South Africa’s current offshoring market. For Van Der Westhuizen, the reason for South Africa’s success in capturing so much of the British market is simple. “It is in the same time zone, there are overnight flights so you don’t lose working hours … [and] people growing up here they speak the same language, they watch the same sports, they have the same cultural alignments and affinities,” he said. “We are seen as Nearshore.”
If Latin America is going to capitalize on its Nearshore advantage in the same way, Van Der Westhuizeen believes it must find a balanced approach. “To be successful you have to get the supply and the demand right,” he said. “We had to work hard on getting the supply right on this side – specifically skills, technology, infrastructure, all of that had to mature and be developed – but now the demand is coming strong.”